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socrateaser, Lawyer
Category: Real Estate Law
Satisfied Customers: 39155
Experience:  Attorney and Real Estate broker -- Retired (mostly)
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Hello, Im hoping you can help me with a real estate investing

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Hello, I'm hoping you can help me with a real estate investing question. Here's the background:

Over the past 4 years, I have purchased 40 properties in Florida to capitalize on the distressed real estate market. I purchase the property with personal cash, and then rehab the properties with cash before renting them out. I have cashed out some of my equity on 5 of the properties; the other 35 are debt free.

At this point, I'm out of personal funds and just learned that due to new lending guidelines, I can't have more than 5 loans. I'm exploring commercial lending options, but many have suggested I source private money in order to continue to grow the business. As the door is closing for tremendous opportunities in this real estate market, time is of the essence on acquisitions. With that said, I do not want to concede any equity, and I want to have full control over all future funds, whether they are my funds or someone else's.

I recently made the following offer to some people in my network: I would offer 10% simple return on an investment from them, with the principle balance due 1 year from the date I'm funded. For illustration, if someone loans be $100k, I would pay them $834/month in interest payments, and then pay them the principle at the end of that year. This way, they'd make $10,000 in interest for their one year investment of $100k.

I'm offering to secure their investment at a 50% LTV (Loan to Value) or better ratio against one of the properties I have that is debt free. So from my illustration above, I would secure the $100k with a property I own that is worth at least $200k. I would have my attorney draw up the proper documents that give them primary and solo lienholder position on that property.

I think this is a fair offering, and because of the low LTV, a great deal of the risks associated with me defaulting are mitigating.

A few of my friends think that the opportunity is "too risky" and that ultimately their investment is not protected. I realize that risk assessments are very subjective, but am I missing something here?

I don't see a general risk in making a loan with security worth twice the loan value. The risk is in the cost of confirming the property's debt free position, via a title report, lender's title insurance, and then ensuring that you are maintaining the property -- because if you're not, then suddenly the deal is very risky.

Also, the cost of a foreclosure can be very high and, the process is lengthy.

Consequently, if I were an investor, I might be more inclined to loan if the property were rented and occupied by a qualified tenant, and I had the right to demand rents from the tenant, and to maintain the property, as may be necessary. A rented property has the benefit that a tenant places some pressure on the owner to maintain the property, and it helps to confirm value. Whereas a vacant property is just an empty shell.

Please let me know if my answer is helpful, and if I can provide further clarification or assistance.
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